. . has never been a reason to throw out an otherwise good model.

Mandatory Arbitration - Waiving Your Right to Sue

Mar 17th, 2012

Last week the Diane Rehm Show discussed arbitration under the rubric Waiving Your Right to Sue. The focus of the segment was on the increasing use of contract clauses to mandate the use of arbitration to settle disputes between corporations and individual consumers / employees. Several years ago my former employer asked me to agree that I would submit any employment disputes that might arise between us to binding arbitration so this subject sparked my interest.[1]

Originally arbitration was seen as a tool to resolve commercial disputes arising between businesses. While justice was a concern, timeliness, low cost, and finality were also important; “Decide against me if you must, but do so today, inexpensively, and without any lingering future uncertainty.” The 1925 Federal Arbitration Act reflects this commercial perspective.

Advocates of arbitration offer up the advantages of lower cost and timelier results. They also offer up statistics that seem to show that for broad classes of issues arbitration and court results are comparable. Indeed it was claimed by the American Arbitration Association that for some types of cases individuals win more often in arbitration than in court and receive larger awards.

So why is this a concern?

A shrewd listener (adamsscn) to this segment commented on The Diane Rehm Show’s web site and reported two of her ‘rules to live by’ that seemed applicable:

Mandatory clauses are in the best interest of the person or entity writing the clause. Or in other words, a mandate favors the one doing the mandating.

When in doubt, it is always in a person’s best interest to maximize his or her options. Giving up an option is never in one’s best interest unless one knows exactly what is being given up.

Postulating for the sake of discussion that arbitration really is in individuals’ best interests, reasonable inferences might include that:

We would expect individuals to select the option of arbitration when the need arose, and further that

There is not justification to mandate arbitration before the fact (since rational individuals would choose it when it made sense.)

Yet increasingly individuals are coerced to surrender their right to access to the courts and forced to resort to binding arbitration to resolve disputes with corporations. These clauses are frequently written into credit card agreements, job applications, labor agreements, product warranties, cell phone contracts, and software end user licensing agreements. You know, all those things we don’t really read but ought to.

Our agreement is, of course, voluntary but it is a peculiarly coerced, and often hidden, definition of voluntary. Coerced in the sense that if you want to apply for the job agreeing to mandatory arbitration is a take-it-or-leave-it pre-condition; no agreement - no job. And hidden in two senses. The first is that for things like product warranties and software licenses you may not see the clause until after the purchase is made. The second sense is one of hidden in plain sight; the clause requiring you to submit to arbitration is right there in plain sight; see in Article 7, Section 4, Subsection 9, para. 23, line 8 in all of it’s sesquapedalian bafflegabish glory. Unless you have a lawyer on retainer to find and explain these clauses to you, you are surely out of luck. [2]

While U.S. Courts were not originally supportive of arbitration in lieu of legal proceedings, both Congress and the Judiciary now strongly support arbitration as an alternate dispute resolution process with the usual endorsement of arbitration’s accessibility, timeliness, lower cost, and finality vis à vis the courts. Wholly apart from my developing suspicion of corporatism this flags to me a larger problem. The proper response to an inaccessible, untimely, expensive, and indeterminate legal system is to FIX IT!. [3]

A cynic might suspect that the relevant stakeholders are confronting perverse incentives that encourage maintaining of our dysfunctional legal system; it seems to work well enough for them that there is no outcry for reform. Perhaps Dick the Butcher was was right after all. [4]

Notes

Late in my effort here I found that there was a relevant recent NY Times Op-Ed piece Struck in Arbitration which I commend to your attention. Alas, if I’d of seen it first I likely would have written less. ↩